7IM Short Thoughts: Probability: talking different languages
How certain can we be when making predictions? It may sound like a trick question, but when talking about events that might happen in the future of finance, the certainty can depend on your impression of the language used in those predictions.
Ben Kumar, Head of Equity Strategy, looks at the importance of not only what we predict for the future, but how we articulate it.
It's quite likely that you're watching this on your phone. What do I mean by quite likely, though? I'm actually making a prediction. Because when we use language to talk about the future, when we talk about probabilities, there's actually a big, big gap in what different people understand by things. YouGov did a great survey on this a few years ago.
And if I say ‘quite likely’ to people, some people think that means 40% likelihood of happening, whereas others think it means an 80% likelihood of happening. And lots of people in the middle. Or take the phrase ‘outside chance’. An ‘outside chance’ of something happening – to some people, that’s zero. It's not likely to happen at all. To others, it could be as much as 80%.
It's a huge, huge gap. And when it comes to finance, we often have to communicate about things that might happen in the future and how likely they are to happen. But if we're talking at cross-purposes, if I'm saying ‘quite likely’ to mean 40% chance, and the person on the receiving end is hearing 80% chance, there's a huge amount of disappointment in that gap that I've set because of the language I used.
We have to be really, really careful to make sure we're all talking about the same thing when it comes to the future.